Fairtrade International Training Manual 3.2 – June 2014
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Fairtrade International Training Manual 3.2
FAIRTRADE PREMIUM COMMITEE FINANCIAL
MANAGEMENT
- June 2014 Update -
Elaborated by Konrad Matter
Update by Julia Malquín A.
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The Training Manual “Fairtrade Premium Committee Financial Management” is a product of the
Fairtrade Labelling Organizations International e.V., Bonn, Germany. Fairtrade International is the
worldwide Fairtrade standards setting and certification organization.
Contact information:
Fairtrade International
Bonner Talweg 177
53129 Bonn
Germany
Tel.: +49 (0) 228 949 23 0
Fax: +49 (0) 228 242 1713
Email: [email protected]
Website: www.fairtrade.net
Coordination:
Liaison & Service Development
Producer Service and Relations Unit
Fairtrade International
Special thanks go to the United Nations Online Volunteering Services, namely Mr Graham Bowler, for
the support provided
Reproduction of text is permitted, provided that the source is cited, Fairtrade International e.V. June
2014
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Table of Content
1.
2.
INTRODUCTION ................................................................................................. 4
FINANCIAL PLANNING ...................................................................................... 4
(a)
Budgeting ..................................................................................................... 4
(b)
Cash flow planning ....................................................................................... 7
3. ACCOUNTING AND BOOKKEEPING................................................................. 8
4. FINANCIAL REPORTING ................................................................................. 16
(a)
Information to the Fairtrade Premium Committee....................................... 16
(b)
Information to the workers .......................................................................... 17
(c)
Information to the certification body FLOCERT .......................................... 17
5. FINANCIAL PROCEDURES ............................................................................. 18
(a)
Preparing the source documents on income and expenditure ................... 18
(b)
Payment procedure .................................................................................... 19
(c)
Bank account management ........................................................................ 20
(d)
Petty cash management ............................................................................. 22
(e)
Procurement procedure .............................................................................. 23
(f)
Fixed assets management ........................................................................ 24
6. CONTROL / AUDITING ..................................................................................... 25
(a)
Internal control ........................................................................................... 25
(b)
Internal auditing .......................................................................................... 27
(c)
External financial audit ............................................................................... 27
Sources used in the elaboration of this manual .................................................... 29
APPENDIX
1. Spreadsheet Budgeting (Consolidated Project Budget by Month, Annual
Budget, Budget Control, Cash Flow Forecast)
2. Debit and Credit
3. Sample chart of accounts for organizations
4. Spreadsheet Forms (Monthly Cash Flow Report, Income Voucher, Expense
Voucher, Petty Cash Voucher, Payment Order, Bank Reconciliation
Statement)
5. Spreadsheet Cash Flow Report Forms (Cash Flow Report, Petty Cash Report)
6. Proposed text elements for master presentation
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1. INTRODUCTION
The Fairtrade Standards1 make the Fairtrade Premium Committee (FPC) accountable for
managing the Fairtrade Premium for the benefit of all workers (Standards clause 2.1.1). In
particular, this means the FPC is responsible for financial management, and sound,
transparent administration of the financial resources.
This manual aims to assist the FPC in this delicate task. Its purpose is two-fold:
(a) Help the FPC (and other committees dealing with finance) to understand the basic
principles and procedures of financial management. The FPC should know the basic
concepts of book-keeping and be able to read and understand a financial report.
(b) Guide the FPC in financial operations, particularly the treasurer and other committee
members directly involved in them. The FPC should establish, know and follow
procedures for ensuring transparent and safe financial administration. This includes
establishing a simple system of financial records that serves as the basis for the
bookkeeping.
The FPC or the treasurer are not expected to become proficient in accounting or to be able
to do the bookkeeping themselves. This must be done by a professional accountant. But the
accountant only enters data provided by the FPC. To do their job properly, they need full
details of all financial transactions from the FPC; hence the importance of accurate record
keeping. And it is not the accountant, but the FPC, that is accountable for spending the
money. Since there is a fundamental difference between spending one’s own private money
and administrating money on behalf of an organization, the FPC must follow certain financial
administration rules. This is the purpose of the financial procedures.
2. FINANCIAL PLANNING
Planning means making arrangements for the future. Financial planning is making a plan
expressed in monetary terms. The main instrument for financial planning is the budget,
usually for one year: the annual budget. Another useful financial planning tool is the cash
flow plan, especially useful if you are running several projects at the same time.
(a) Budgeting
Budgeting is the process of drawing up a budget. A budget is the summary of a work plan
expressed in monetary terms. The budget is thus an integral component of the Fairtrade
Premium Plan that the FPC prepares every year (Standard clause 2.1.15)2. The period
covered by the budget is normally one year. The budget depicts what you expect to spend
(expenses) and earn (income or revenue) over a time period. It is necessary for planning any
1
Generic Fairtrade Standards for Hired Labour. Citations of the standards in this manual always refer
to these standards.
2
For more details on the workplan see Fairtrade Training Manual Fairtrade Premium Committee
Processes.
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activity that needs to be funded, since it tells you how much money you will need for that
activity.
The budget is a powerful management tool. It helps the FPC to implement its strategic
decisions. It is perhaps the most efficient way of ensuring cost control and achievement of
objectives.
The FPC needs to work with two kinds of budget:
1. Project budgets for each individual project, and
2. The consolidated annual budget of the organization3 linked to the Fairtrade Premium
plan. Consolidated budget means that all activities and operations are included in it.
The Fairtrade Training Manual Premium Project Management gives guidance on how to
draw up a project budget. Here we will deal with the consolidated annual budget of the
organization as a whole.
The objectives of the budget are:
(i) To know how much money you need for the actions you plan and where you get the
money from: the projected expenses and income;
(ii) To monitor the financial operations and to know at any time how your financial plan is
performing.
According to this double objective, we can distinguish two activities related to budgeting:
aa) Drawing up the budget
You may proceed step by step, as follows:

Define the activities: The budget is based on the workplan, which should describe all
projects/activities you plan for the next year. The budget ‘translates’ the workplan into
monetary terms.

Estimate the expenses. Most activities need money. Thus for each activity, you estimate
how much it is going to cost (expenses). This should be relatively easy if you have
already made the budgets for the individual projects, which are then integrated into the
overall budget.
If you have a business project (commercial or industrial), it should be self-sustaining, i.e.
fully cover its running costs and possibly generate a small profit. These types of project
must have their own business plan with the corresponding budget. The consolidated
budget contains the sum of expenses and income of the project. Expenses refer to (i) the
capital investment that is made with premium money to start (or enlarge) the business
project and (ii) the running costs. Income refers to the revenue generated by the project.
Besides projects, the FPC plans other activities, such as training and administration. You
have also to make an estimate for the cost of these and put them into the budget. For
estimating the training costs, you need to have a training plan with a budget similar to the
project budgets.
3
The term organization refers to the legal body entity the workforce has constituted as the owner of
the Fairtrade Premium, according to Standards clause 2.1.3. It comprises all employees, not only the
FPC members.
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For estimating the administrative costs, you must keep in mind all cost factors and add up
all items, such as stationary, purchases, depreciation and maintenance of office
equipment, travel costs, salaries and personnel services (accounting), communication
(phone, email), banking charges, etc. If you hire office space you will also have the costs
of rent and public utilities (electricity, water). If this is not your first year of operation, you
can base your estimates on the actual costs of the previous year.

Estimate the income or revenue: The first item to consider is the surplus from the
previous year. The main source of new income is probably the Fairtrade Premium. Maybe
you have other external funding such as a donor or Government contribution to one or
several projects. Also some activities/projects might generate income. A business project
is expected to generate income that must be included in the consolidated budget. Or a
professional training project might charge a small fee from the students. Other incomes
are interest on saving accounts and investments.

Check the balance: Income should cover expenditure or allow a surplus.
Table 2.1: Sample budget format
BUDGET 2015
Country:
Company:
Organization:
Period covered by the budget:
Currency:
INCOME
Balance from 2014
Expected premium income 2015
Income generated by projects:
Project 1 (gross income of business project)
Project 3 (students’ fees for training course)
Donation (co-financing of project 3 by NGO)
Other income (interest, etc.)
Total Income
EXPENDITURE
Project 1 (running costs of business project)
Project 2 (ongoing social project)
Project 3 (new: training project)
Project 4 (new business project: initial investment cost)
Training 1
Administration
Total Expenditure
BALANCE (surplus)
5000
20,000
3700
300
3000
500
32,500
3000
6500
10,000
5000
2000
2500
29,000
3500
You can present the budget in an Excel spreadsheet. Working with Excel allows copying of
the individual budgets for projects and training directly into the consolidated budget. For
FPCs with complex operations and with computer experience, it is highly recommended to
use a spreadsheet. A sample format can be found in Appendix 1: Appendix 1 N°1 shows the
detailed project budgets with monthly expenditure projections consolidated in one table.
From this table the totals are inserted into Appendix 1 N°2, which presents the consolidated
annual budget of the organization.
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ab) Monitoring budget compliance
It is important to know whether the budget is met. Monitoring the budget is the tool that
enables controlof budget performance and timely reaction if the budget targets are not met.
Monitoring means recording the performance (actual figures on income and expenditure) and
comparing it with the budget. If the actual performance is better than the budget, normally
you need not worry, except if this is due to a delay in the payment of the Fairtrade Premium
Plan. If performance is below expectation, you have to look carefully into the issue. The gap
between budget and actual performance may be because either the expenses exceed the
budget or the income lags behind. If the gap is considerable, the FPC should analyse the
differences and take the necessary measures to balance the budget again. Adapting plan
and budget might be necessary.
Budget control is done on two levels: on project level for each individual project and on the
level of the general budget for the whole organization. The FPC should fix dates for periodic
monitoring of the workplan and budget. Best practice is to make monitoring of the general
budget a mandatory item of the regular (monthly) FPC meetings. Appendix 1 N°3 shows a
sample form for monitoring the budget of an individual project. The form can be easily
adapted for the purpose of monitoring the general budget.
(b)
Cash flow planning
The term cash flow refers to the amount of cash being received and spent during a defined
period of time. The method for calculating the cash flow is subtracting the cash
disbursements from the cash receipts.
The cash flow forecast ensures that the funds are available when they are needed. It gives
an estimate of the monthly cash requirement and availability. While the budget shows
financial projections for the whole year, the cash flow plan breaks the budget down into
monthly instalments according to the calendar of activities. The cash flow plan is the twin of
the monthly workplan; the respective budget corresponds to each activity. The cash flow plan
protects you from the surprise of not having liquid cash at the moment you need to make an
important payment. Appendix 1 N°4 shows a sample format for cash flow forecast.
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3. ACCOUNTING AND BOOKKEEPING4
The purpose of this chapter is not to train the reader in bookkeeping. The intention is
considerably more modest. After studying the chapter, you should be able to understand
what accounting is and what the basic steps involved in it are. You should also be able to
understand how a financial report is constructed, what it should look like and how to read it.
The terms accounting and bookkeeping are nearly synonymous and often used alternately.
Accounting means the process by which financial information is recorded, classified,
summarized, interpreted, and communicated. Bookkeeping is more specific and refers only
to the recording of financial transactions. A transaction is any exchange of economic value
between business partners, such as selling and purchasing, providing services, lending
money, etc.
The objectives of accounting are:




Enabling FPC members and eventually workers to know the amount of Fairtrade
Premium earned and how it was spent;
Enabling the FPC to take financial decisions in full knowledge of the financial situation of
the organization;
Enabling other stakeholders to confirm that the funds are being utilized in accordance
with the overall goal of Fairtrade;
Meeting the legal and professional requirements.
The function of accounting is to process financial information with the purpose of knowing the
financial performance of an organization. This can be a business company, a Government
department, or a charity organization. Accountability for financial management is not possible
without accounting. Accounting allows us to know how much we have earned, how much we
have spent, where our revenue came from, how we have spent the money, and whether we
did well or badly financially-speaking. In other words: whether we earned or lost money.
The accounting system most commonly used is double-entry bookkeeping. It consists of a
chart of accounts, each of which reflects a particular aspect of the business. Some of the
basic accounts you will use are:




Cash = The liquid funds you have in the
safe and in bank accounts
Accounts receivable = The money your
business partners/customers owe you for
goods and services you provided for
them
Inventories = Stocks of products, raw
materials, etc. you have in your stores
Equipment = Furniture, office equipment,
vehicles, etc.
4
These are called asset accounts,
because they represent economic
resources
controlled
by
your
organization.
For references and further study see the list of sources at the end of this manual. The procedure and
tools explained in this chapter conform to International Accounting Standards.
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
Accounts payable = The money you owe This is a liability account, because it
obligations
of
your
your business partners/suppliers for goods represents
organization to your business partners.
and services you received from them

Capital = The money owned by the This is the owner’s equity account. Its
worth results from the sum of all assets
organization
minus all liabilities.

Income = The money you earn. Premium Normally you have several income and
income will also be recorded in this account. expenditure accounts, according to the
nature of your business. You have
Expenditure = The money you spend
separate accounts for any category of
income and expenditure.

In double-entry accounting every transaction is recorded by entries in two accounts: As a
DEBIT in one account and as a CREDIT in the other account. It is not easy to explain when
an entry is made as a DEBIT or a CREDIT5. For practical purposes, you can follow the rule:
 DEBIT entries = increase in debit accounts or decrease in credit accounts
 CREDIT entries = decrease in debit accounts or increase in credit accounts.
Debit accounts are assets and expenditure;
Credit accounts are liabilities, capital and income.
Table 3.1 summarizes this rule (+ = increase, - = decrease):
Account
Assets
Liabilities
Capital
Income
Expenditure
Debit
+
+
Credit
+
+
+
-
Note that the usage of the terms DEBIT and CREDIT in accounting is not identical to their
everyday usage.
The rationale for the double-entry bookkeeping system is that any transaction affects two
aspects of a company. This is illustrated by two simple examples:
Transaction 1: The company purchases a computer. On one side, its assets increase, and
this is shown by the recording in the equipment-account (DEBIT Equipment). On the other
side, the computer must be paid for, and this diminishes the company’s cash, which is
expressed by the recording in the cash-account (CREDIT Cash).
Transaction 2: Now the opposite happens: The company sells a product from the store. On
one side, its inventories decrease, which is recorded in the inventory-account (CREDIT
Inventory). On the other side, cash increases, which is recorded in the cash-account (DEBIT
Cash).
The total of the DEBIT values must always equal the total of the CREDIT values.
5
Readers interested to understand the DEBIT/CREDIT logic in more depth are referred to Appendix 2.
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Historically, DEBIT entries have been recorded on the left hand side and CREDIT values on
the right hand side of a ledger account. Ledger accounts are set up as T accounts, so called
because they resemble the letter T.
Cash
DEBIT
CREDIT
The accounting process is a series of activities that begins with a transaction and ends with
the closing of the books. Because this process is repeated each reporting period, it is
referred to as the accounting cycle and includes the following major steps:
(a) Preparation or collection of the source documents of a transaction. In financial
management, a document is produced each time a transaction occurs. The records of
transactions are referred to as source documents. During audits they are used as
evidence that a particular transaction occurred. Examples of source documents are:






Invoices and receipts for sales and purchases
Income and expense vouchers (see below)
Deposit slips for putting money into a bank account
Cheques for payments out of a bank account
Purchase orders
Payment orders
Often a transaction generates more than one source document. Let’s take the example of
the purchase of computers by the FPC, which is paid for immediately by cheque. This
transaction is recorded in several source documents: (i) purchase order, (ii) invoice, (iii)
payment order, (iv) cheque, (v) receipt.
Who is responsible for producing, receiving and filing the source documents? This
is clearly the task of the treasurer. They must prepare and/or collect and keep the source
documents very carefully and make sure that none are missing. The source documents
are indispensable inputs for the following step. We will discuss in more detail in Chapter 5
how source documents should be prepared. Besides the source documents, the treasurer
also receives and keeps all other documentation related to the management of the
accounts, such as monthly bank statements.
(b) Entry of the transaction in the general journal. The journal is the entry point of
transactions into the accounting system. It is a chronological record of transactions,
showing an explanation of each transaction and the accounts affected.
It takes the following form:
Date
DD.MM.YYYY
DD.MM.YYYY
DD.MM.YYYY
Name of DEBIT account
Name of CREDIT account
Optional: Explanation of transaction
DEBIT
Debit amount
Before the journal entry is made, the following questions must be answered:
 Which accounts are affected by the transaction?
 Which account must be debited?
 Which account must be credited?
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CREDIT
Credit amount
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Examples:
Transaction 1: On 3/11/2014 a premium of 1500 was received. The journal entry is:
Date
3/11/2014
Cash
DEBIT
1500
Income
Premium from customer
CREDIT
1500
Transaction 2: On 9/11/2014 a computer was purchased for 900 and paid immediately.
The journal entry is:
9/11/2014
Equipment
Cash
Purchase of computer
900
900
Transaction 3: On 16/11/2014 travel expenses of 20 were paid. The journal entry is:
16/11/2014
Expenditure
Cash
Travel expenses first half of November
20
20
After the transactions have been recorded in the journal, the source documents must be
kept carefully. It should be possible to check the journal entries with the supporting
documents at any time. A simple way is to keep them in a file in chronological order.
Journal entries may be done continually (daily or whenever a transaction occurs). If you
have only a small number of transactions, it can be done in a batch at the end of the
week or even the month. This depends also on the question of who is doing this job.
Who should be responsible for keeping the journal? You have to be aware that this
step is actually a bookkeeping task – in contrast to the preparation of source documents.
But correct journal entries are crucial for the proper handling of the following steps.
Therefore, the task of filling in the journal is normally done by the accountant, and not the
treasurer. However, this depends on the capacity and willingness of the treasurer. If they
have been properly trained and feel capable and comfortable of doing it, they should be
encouraged to try. Of course they must be guided and coached by the accountant.
Wrong entries in the journal could create confusion and make more work for the
accountant than if they do it themselves. even if the accountant keeps the journal, the
treasurer is still responsible for preparing the source documents, which are handed over
to the accountant.
(c) Posting of journal entries to the general ledger. Once entered in the journal, the
transactions are posted to the appropriate T accounts in the general ledger. While the
journal is organized chronologically, the ledger is organized by accounts. The general
ledger is a collection of accounts. The accounts of the ledger take the form of two-column
T-accounts, as explained above.
The list of all accounts of the bookkeeping system is referred to as the chart of accounts.
It must be designed by the accountant. It should not just be a replica of the system of a
business company but should consider the specific nature and needs of the organization.
Each account in the chart is assigned a unique account number or code.
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A suggestion for an account chart is presented in Appendix 3.
To illustrate posting to the ledger accounts, we use the same examples as above. Four
accounts were involved in these two transactions: Cash, equipment, income and
expenditure. You post the journal entries for each transaction to the respective account:
Transaction 1: On 3/11/2014 premium of 1500 was received
Cash
Debit
3/11
Credit
Income
Debit
1500
Credit
3/11
1500
Transaction 2: On 9/11/2014 a computer was purchased for 900
Equipment
Debit
9/11
900
Credit
Cash (2)
Debit
3/11
1500
Credit
9/11
900
Transaction 3: On 16/11/2014 travel expenses of 20 were paid
Expenditure
Debit
16/11
20
Credit
Cash (3)
Debit
3/11
1500
Credit
9/11
16/11
900
20
Note the direct mapping between the journal entries and the ledger postings. Maybe this
posting of transactions that have already been entered in the journal seems redundant.
However, the general ledger serves an additional function. It allows you to view the
activity and balance of each account at a glance. Look at cash account (3): all three
transactions have affected this account (which is not always the case, of course). After
the posting the last transaction you can see at once what the cash balance is:
1500 – (900 + 20) = 580. Adding up the accounts is called balancing.
Steps a) – c) described above are performed at any time during the accounting period, either
when transactions occur or in periodic batches (at the end of the week or month). While step
a) must be performed by the treasurer, step b) might be done by the accountant or the
treasurer. Step c) and all subsequent steps should be performed by the accountant.
The following steps are performed at the end of the accounting period. The accounting
period means the time after which the books are closed and the financial statement is
prepared. This should be done at least at the end of the business year; however, it is
recommended to do it in shorter intervals, monthly or at least quarterly.
(d) Preparing the trial balance. The term trial balance means that it is used to test whether
DEBITS equal CREDITS. Trial balance is a list of the balances of all accounts in the
ledger. The amounts are copied to a two-column list: the DEBITS (the sum of all debit
entries) into the left column and the CREDITS (the sum of all credit entries) into the right
column, as shown in the following table:
Table 3.3: Sample trial balance
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Account title
Cash
Equipment
Income
Expenditure
TOTAL
Debits
1500
900
Credits
920
1500
20
2420
2420
The total of the DEBITS should equal the total of the CREDITS. If this is not the case
then an error has occurred that must be corrected. It could have been a maths error (in
the addition), a recording error (entry of wrong numbers) or a posting error (entries in the
wrong column).
(e) Preparing adjustments. Why are adjustments necessary? Transactions are recorded in
the journal at the date when they occur. But some transactions are not applicable to the
actual period and other transactions applicable to the period have not yet been recorded.
There are two major types of adjusting entries:
 Accruals are revenues actually earned and expenditure actually incurred, but not
recorded in the books. Example: Salaries for the month that will be paid at the
beginning of next month.
 Deferrals are revenues and expenditure that have been recorded but not earned or
incurred in this period. Example: Prepaid insurance premium.
The adjusting entries are posted in the ledger accounts. Then an adjusted trial balance is
prepared the same way as explained above.
(f) Preparing the financial statement. This is the closing of the cycle. The financial
statement consists of two parts: income statement and balance sheet. They are both
derived from the general ledger.

Income statement6 reports what the organization has earned (income), spent
(expenditure) and the resulting net income (called profit for business enterprises or
surplus for not-for-profit organizations) during a period, for instance from January 1 to
December 31.
Table 3.4: Sample Income Statement from … to…
Expenditure
Income
Income
Premium income
Donation from NGO for project
Income generated by projects
Financial income (interest on savings and investments)
25,000
3000
2000
800
Expenditure
Project 1
Project 2
Project 3
Training and capacity building
Administrative costs
Professional services
Depreciation of equipment
6
4500
2000
11,000
3000
1900
500
250
The Income Statement is also referred to as Income and Expenditure Statement; for not-for-profit
organizations the term Statement of Operations is also used.
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Financial costs (bank charges)
36
Total
23,186
Net Surplus
7614
30,800
30,800
The statement can have different forms (e.g. income and expenditure in the same
column) and can give more details (e.g. administrative costs by items). You can also
choose to include comparative figures from previous years in an additional column in
the statement.
The table shows the principle. Instead of a surplus, a loss may result, which is
possible if you had high premium volumes accumulated in previous years that have
now been used. The loss then would not be a cause for concern, since the purpose of
a not-for-profit organization like yours is not making gains, but to use the money well.

Balance sheet reports the assets, liabilities and capital. The balance sheet is a
snapshot of the financial situation of an organization at a specific moment in time.
Table 3.5: Sample Balance Sheet as at…
Assets
Liabilities
Assets
Current assets
Cash and bank
Accounts receivable
Inventories
2200
300
450
Fixed assets
Office equipment
Equipment project 1
Long term investments
1350
4700
8000
Liabilities
Current liabilities
Accounts payable
Accrued liabilities (professional services)
860
300
Long-term liabilities
Loan payable
1000
Capital
Accumulated premium funds
Surplus for the year
7226
7614
17,000
17,000
Terminology:
Assets are the economic resources in the control of an organization, the valuables
you possess and can work with.
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Current assets are assets that are in cash or can be easily converted into cash within
one year.
Fixed assets are assets that cannot be easily converted into cash. They include land,
buildings, machinery, equipment, vehicles, etc. Also long term investments (over one
year) are recorded under this category.
Liabilities are the obligations (debts) owed to third parties (banks, suppliers, etc.).
Current liabilities are debts that must be paid within one year.
Long-term liabilities are debts due more than one year from the current date.
Capital, in business referred to as ownership equity, is the owners' interest in all
assets after all liabilities are paid. This is the portion of the business that actually
belongs to the owner. In the case of not-for-profit organizations like yours, capital
refers to the accumulated surpluses (premium funds not spent). The formula says:
Ownership capital = assets – liabilities.
The generally accepted accounting principles underlying the financial statements
are:
 Completeness
 Clarity or transparency
 Prudence
 Consistency in presentation, disclosure and evaluation
 Prohibition of netting (i.e. expenditure and income are to be presented at gross
amounts, it is not allowed to offset a positive value against a negative value)
Flow chart of the accounting cycle:
Treasurer
DATA
CAPTURE AND
RECORDING
Examples:
Receipts
Payment vouchers
Step b + c:
DATA
PROCESSING
Examples:
Journal entries
Ledger postings
Step a:
Accountant (or
treasurer, if trained)
Step d - f:
REPORTING
Accountant
Examples:
Income statement
Balance sheet
Computerizing the accounting system saves a great deal of time and effort. It reduces (if
not eliminates) mathematical errors and allows for much more timely information than a
manual system does. It also saves some of the steps discussed above. Computerized
systems usually combine step b) (Journal entry) and step c) (Ledger posting). Also the need
to test if DEBITS and CREDITS are equal through the trial balance is usually not required,
since most systems calculate this automatically when the data is entered. However, though
the computer can handle the mechanics of the system, human judgement is still required to
ensure that the data entered into the system is correct.
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4. FINANCIAL REPORTING
Regular financial reporting is a central requirement of the Fairtrade standards. Information on
the Fairtrade Premium amount (Standards clause 2.1.12), its administration and use must be
given to the FPC itself (Standards clause 2.1.12), to the workers and to the certification body
(Standards clauses 2.1.12 and 2.1.18).
(a) Information to the Fairtrade Premium Committee
According to Standards clause 2.1.12, all relevant books of the Fairtrade Premium account
must be available to all FPC members. Information on premium flow and balance is a
mandatory agenda point at FPC meetings. Best practice is monthly reporting. High premium
income must be reported immediately, even between meetings.
The responsibility for informing the FPC on the flow and balance of the premium lies with the
treasurer. In order to ensure that all receivable premium money has been accounted for, the
treasurer should perform the following tasks monthly:





Ascertain from the company’s Fairtrade sales reports (to be provided by management)
the amount of premium due (Standards clause 2.1.12);
Check when the corresponding deposit is made to the premium account and compare the
amount credited with the sales reports;
Check with the bank statement to ensure that the correct exchange rate has been used
to convert the amount into local currency;
Any variances with the sales report or the bank statement must be followed up
immediately for rectification. Differences must be explained (for instance, less sales
income due to quality claims).
Prepare the income voucher for the premium amount deposited in the bank account.
In the case of income from investments the treasurer needs to ensure that the interest
earned is correct by checking against the rate of interest.
The report on premium income and balance takes the following form:
Table 4.1: Summary Fairtrade Premium (FP) flow report format
MONTH:
Balance at beginning of the month
Plus: Income
Minus: Expenditure
Balance at end of the month
CURRENCY
This form can be found in Appendix 4 N°1 as an Excel spread sheet. It is sufficient for FPCs
with a low turnover and few financial operations.
If the FPC has a higher turnover and more intensive financial activities, another, more
sophisticated format is recommended. It is presented in Appendix 5 N°1. This FP flow report
form allows a complete record of all transactions in chronological order. It follows the same
logic as the simpler form presented in Appendix 4 N°1. But it is structured in a more
functional way, since it allows you:
 to check income and expenditure and the resulting balance at any time;
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

to check expenditure and income of each individual project and other budget items (such
as administrative costs) at any time;
to produce a cash flow report at desired intervals; monthly, quarterly or whenever you
wish.
The assumption is that the organization has one current account and all financial operations
are handled through this account. The register is kept in local currency, except premium
earnings which are registered in foreign currency and then converted into local currency7.
It is highly recommended that the FPC uses this form, because, in addition to the above
mentioned functions, it has the following advantages:
 It is easy to handle and can be managed by the treasurer after a short period of training
(if they are computer-literate). It is less demanding than the journal referred to in 3b
above);
 It allows daily entries and shows the daily balance of funds;
 The sums in each column can be easily transferred to a summary report;
 It is useful for FLOCERT because it allows the auditor to check at a glance the basic data
on premium earnings and expenses project by project.
(b) Information to the workers
A financial report must be submitted to the workers (General Assembly) at the end of the
business year (Standards clause 2.1.18). This report consists of the financial statements
discussed above (see 3f):
 Income statement
 Balance sheet
These reports will normally not contain full information on individual projects, because they
are summarized statements. The workers are probably interested to know the financial
performance of each project. For this purpose a short summary on each project (budget –
expenditure – income if applicable) should be presented. The information on project
expenses and income can be easily extracted from the cash flow format in Appendix 5 N°1
discussed above.
Together with the Fairtrade Premium Plan for next year, the budget must also be submitted
to the GA (2.1.15).
An annual financial report and a budget are the minimum pieces of financial information that
the FPC is required to give the workers. However, it is recommended that more financial
information is shared with them and done so more frequently than just once a year. For
instance, the monthly summary of cash flow report (Table 4.1) may be put on the notice
board. Because of the cash flow report format (Appendix 5), workers can be informed more
frequently about the financial situation.
(c) Information to the certification body FLOCERT
7
This form can be expanded, according to need. For instance, if you wish, you can insert additional
columns for income in local currency: premium income, income from projects, other income (interest,
etc.). The number and nature of expenditure columns depends on your projects and activities.
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The financial statements and the budget established at the end of the fiscal year must also
be presented to FLOCERT. The financial reports should be accompanied by the report of the
external audit8. These documents may be handed over to the FLOCERT auditor.
The FLOCERT auditor requires updated information on premium income, premium
expenditure per project and premium balance. As suggested above, the best way to have
this information ready any time is to record it with the cash flow format of Appendix 5 N°1.
5. FINANCIAL PROCEDURES
This chapter aims at providing the FPC with practical guidance on central issues of daily
financial administration. The intention is to make financial management more efficient and
safer.
(a) Preparing the source documents on income and expenditure
The importance of written documents on all transactions has already been stressed in
Chapter 3a. The FPC and particularly the treasurer must follow very strictly this rule: No
financial transaction without a document. In this section we will discuss the main types of
documents and the minimum requirements they should comply with. We will also make
suggestions for some forms for the FPC to use.
As a minimum, each source document should include:
 The date
 The amount
 A description of the transaction
Where practical, beyond these minimum requirements, source documents should contain the
name and address of the other party to the transaction.
When a source document does not exist, e.g. when a cash receipt is not provided by a
vendor or misplaced, an internal document should be generated immediately after the
transaction (vouchers as described below).
To make sure that any transaction, either income or expenditure, is properly documented,
the use of a system of vouchers is recommended. These vouchers, numbered and filed in
chronological order, facilitate the job of the accountant. The voucher contains the information
necessary for the accountant to know which accounts are affected by the transaction. Two
different forms are used9:

An Income voucher is generated any time the organization receives a payment:
premium transfer, interest payment, income generated by premium projects (sales,
provision of services, loan repayments, etc.). The voucher is made independently from
the form of payment, whether it is in cash, by cheque or a bank remittance.
See model Income voucher in Appendix 4 N°2
8
See below Chapter 6c
If you decide to use these forms, it is useful to have them printed with the letterhead of the
organization.
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The voucher has two parts: the upper part is for the information on the nature of the
transaction:
 Number, date and amount
 Received from: name and address of the payer
 Amount in words
 Description of transaction
 For project: if payment is destined for one or several specific projects, or for
administration
 Form of payment: cash, cheque or bank remittance
 If cheque: cheque number and bank
 If amount has been deposited in a bank account: account number and bank
This part of the voucher must be filled in by the treasurer. It should then be revised by a
workers’ representative on the FPC and by a management advisor
The lower part of the voucher is for the use of the accountant. After registering the
transaction in the books, they fill-s in the corresponding boxes in the voucher.

An Expense voucher is generated any time the organization makes a payment by
cheque (for cash payments a different voucher referred as petty cash voucher is used;
see below 5d).
See model Expense voucher in Appendix 4 N°3
The form is very similar to the income voucher. It should be filled in in the same way by
the treasurer and revised by a workers’ and a management representative. The box
‘Supporting document’ refers to the invoice and/or receipt provided by the supplier.
These vouchers are not meant to substitute for the supporting documents provided by the
business partners, such as invoices, receipts, credit notes from the bank, etc. The original
receipts must always be attached to the vouchers.
(b) Payment procedure
The FPC must issue a payment procedure. For any payment to be made, the payment
procedure has to be strictly followed. The procedure must regulate:
 What requirements must be fulfilled prior to payment
 Form of payment (e.g. amounts exceeding 20 USD only by cheque)
The purpose of the payment procedure is transparency and security.
The following steps should be followed in the payment procedure:
 All payments must be based on a FPC decision and – if applicable – have followed the
regulations on procurement (procurement procedure, see below 5e).
 Except for petty cash expenditure, the treasurer issues a payment order with all the
information necessary to check whether payment is based on an FPC decision and the
procurement procedure. See payment order form in Appendix 4 N°5.
 The payment order is checked and payment authorized by at least two people: a workers’
representative (according to the internal regulations this can be the FPC chairman or
another FPC member) and a management advisor. Preferably the authorizing people
should not be signatories of the account.
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


Amounts exceeding the limit fixed by the FPC must always be paid by cheque or bank
remittance. Only small amounts can be paid cash.
When authorization of the payment order is complete, the treasurer issues the cheque
and presents it to the signatories of the account together with the payment order.
Signatories must check the payment order (and supporting documents) before signing
the cheque.
Payment is made against receipt.
(c) Bank account management
The organization must open a bank account for receiving and administering the premium.
The joint signatories must be at least one workers’ representative and one management
advisor (Standards clause 2.1.5). The FPC may specify this requirement or make it stricter
(for instance, two workers plus one management representative) but not loosen it.
Current account: It is recommended that for the day-to-day operations a current account is
used. In a current account usually no interest is earned. But the money is deposited and
withdrawn easily at any time. The main advantage of the current account is the cheque book,
which is issued to enable the account holder to make payments and withdraw money.
Payments made by cheque are safer than cash and can be easily traced. The current
account should be the only account used for payments.
The chequebook must be kept by the treasurer in a safe place under lock and key. Cheques
should never be signed blank or post-dated. Date, payee and amount should always be filled
in before a cheque is signed.
High premium balances, which are not needed for meeting shortterm obligations, should be
invested in interest-earning but safe financial instruments. These may be, for instance,
savings accounts or fixed deposits10.
Records: The treasurer should keep an updated record of all transactions (deposits,
remittances, payments) on the current account. The information on the bank balance must
be readily available at any time. As soon as the transaction is carried out, it should be
registered in the corresponding book. According to your recording practice and your
accounting system, you have the following possibilities:



The transaction is recorded in the cash flow report form (Excel spread sheet) suggested
in Appendix 5 N°1. This is the most efficient way.
If your entire accounting system is computerized, the entry can be made directly into the
system (you have to know which account is to be debited and which one credited). This is
more complicated and requires that the treasurer is familiar with how to use the system.
If you have neither of these two possibilities, the treasurer should have a separate cash
book where the transactions are registered manually or by computer if the treasurer is
computer-literate.
The form of the cash book is very simple, as shown in the following table:
Table 5.1: Sample form of cash book
10
A fixed deposit is an account where money is placed for a specific period of time, say one month,
three months, six months etc. Funds in such an account cannot be withdrawn before the time period
expires or with a penalty such as losing the interest due. Normally a fixed deposit account earns
slightly higher interest than a savings account.
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CASH BOOK
Name of organization
Bank and Current Account N°
Date Cheque
Voucher
Payee
N°
N°
or payer
Description
Income
Expenditure
Balance
Bank statement: The bank sends a monthly statement to the account holder, which shows
the following information:
 Deposits, remittances and interest earned (called credits by the bank = income)
 Payments and bank charges (called debits by the bank = expenditure)
 Balance at the end of the month.
If the statement is not sent, inquire why and ask the bank to send it regularly. It must go to
the treasurer, who checks the statement and compares it with their own records.
Bank reconciliation: Comparing the figures from the books (your records of the bank
account) against those on the bank statement is called bank reconciliation. This is a very
important task to be performed at the end of each month by the treasurer (or the accountant).
The balance of the bank account record should reconcile (match) with the balance of the
bank statement. If this is not the case, there might be an error from either side, yours or the
bank’s. But more probably the difference is due to a time lag between banking operations
and accounting. Differences may be explained because:
 Cheques drawn and registered in your books as expenditure have not yet been
presented to the bank for payment and consequently have not yet been debited from your
bank account;
 Cheques deposited at the bank and registered into your books as income have not yet
been credited by the bank;
 Bank charges and interest have been entered onto the bank statement but are not yet
recorded in the account.
The treasurer should, therefore, prepare at the end of every month a bank reconciliation
statement. You can establish the statement both ways, either adjusting the balance per
bank or per books. The method proposed here is adjustment per books. That means you
start from the balance recorded in your books which is equal to the balance in the bank
statement. You proceed by the following steps:
1) Compare the balance in your books (bank account record) with the bank statement
balance provided by the bank.
2) If there is a difference, search for any item that does not appear in one of both records
(your books and the bank statement).
3) Items missing in the bank statement:
 Add all outstanding cheques (cheques that you have drawn and recorded as payment
but that were not cashed by the beneficiary)
 Deduct all deposits in transit (deposits you made that have not yet been credited by
the bank)
4) Items missing in your books
 Add all credit notes from the bank not registered in your books (e.g. interest)
 Deduct all debit notes from the bank not registered in your books (e.g. bank charges)
5) The result of these operations should be equal to the balance in the bank statement.
6) In case you have more than one bank account, repeat the steps for all the bank accounts
held by the organization in the period under review.
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Table 5.2: Illustration of bank reconciliation statement
Balance as per books
1300
Add: Outstanding cheques (cheques not cashed)
Deduct: Deposits in transit
Add: Credit notes (interest)
Deduct: Debit notes (bank charges)
+ 300
- 150
+ 20
- 10
Balance as per bank statement
1460
You may also use the electronic format in Appendix 4 N°6
(d) Petty cash management
Petty cash is used only for payments of small amounts (e.g. less than 20 USD) where it is
not practical to use a cheque. It is preferable that the petty cash is not administered by the
treasurer or the chairperson. The FPC should appoint another FPC member to administer
the petty cash under the supervision of the treasurer. This person is referred to as the petty
cash custodian.
The initial petty cash fund is created by issuing a cheque. This is called the imprest system.
The FPC decides on the imprest level. Usually 100 USD would be sufficient for most small
business needs. The initial funding and all refunding transactions are recorded as debit in the
petty cash account and as credit in the bank account.
All petty cash expenditure must be recorded on a petty cash voucher; this is similar, but not
identical, to the expense voucher referred to in 5a for cheque payments. Like the expense
voucher, the petty cash voucher is a source document used for registering the transaction in
the books. Original receipts from the supplier must be attached to the voucher.
See model petty cash voucher in Appendix 4 N°4.
All petty cash vouchers must be recorded in a separate book: the petty cash book. The
simplest way is to use a book similar to the bank cash book suggested above, as the
following table shows:
Table 5.3: Sample of petty cash book
PETTY CASH BOOK
Name of organization
Date Voucher N° Payee
Description
Income
Expenditure
Balance
You may also use an electronic petty cash book, such as that in Appendix 5 N°2.
When the petty cash funds have been nearly spent, they are refunded on request by the
petty cash custodian by the exact amount that has been spent. Thus the petty cash balance
is restored to the original amount.
Control of petty cash is important because of potential abuse. Prior to refunding, the petty
cash book and the vouchers should be checked by someone other than the petty cash
custodian. Additionally there should be a routine control check at the end of each month.
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It might happen that the organization also receives cash payments, for instance, loan
repayments (if you have a loan scheme) or repayments of credits granted on sales of goods
(if you have a grocery store, etc.). These transactions should be handled separately and not
mixed with the petty cash. Each project that receives cash payments must issue special
vouchers and open separate petty cash books to manage these transactions. Cash received
should be deposited as soon as possible into the bank account, in order to avoid
accumulating high cash balances. The forms and controls used for these transactions should
be similar to those described in this section for petty cash management.
(e) Procurement procedure
Procurement is the process of acquiring goods and services by an organization. The
objectives of procurement are:
 Obtain the best in terms of quality, quantity, timeliness and cost of delivered products or
services;
 Conduct business with integrity, transparency, professionalism and fairness.
For hiring personnel, contracting consultants and contractors as well as for procuring
material and equipment, the FPC should establish and strictly observe a procurement
procedure.
The procurement process depends on the complexity of the issue and the amount involved.
The FPC can fix a threshold value (e.g. 500 USD) under which a short procurement
procedure can be followed. We call it procurement procedure A. The steps to follow are:
1. Approval of the expenditure by the FPC as recorded in the minutes. If the expenditure is
contained in a project budget already approved, there is no need for an additional
decision.
2. Obtaining of at least three quotations for the products required
3. Tabling of quotes in FPC meeting and approval of supplier, recorded in minutes
4. Issuing of written purchase order, which must be authorized by FPC chairperson. For the
purchase order, you should use a printed standard form.
5. Payment is made simultaneously with the purchase or subsequently, according to the
terms of payment agreed with the supplier. For the payment, a payment order must be
issued.
A sample purchase order form is proposed in Appendix 4 N°7
For more complex procurements (service contracts) and with amounts exceeding the
threshold, a more elaborate procedure must be used. We call it procurement procedure B.
The steps to follow are:
1. The first step is the same as in procedure A: The expenditure must be approved by the
General Assembly or contained in a budget that has been approved by the GA. The
decision must be clearly expressed in the minutes of the relevant meeting.
2. Definition of the terms of reference (in case of contracting), technical requirements and
product specifications (in case of purchase) by the FPC or the sub-committee responsible
for the project. Independent professional technical advice in this step is highly
recommended.
3. Tendering: At least three bids must be obtained through a tendering process.
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4.
5.
6.
7.
8.
9.
(f)
Generally tendering should be open, i.e. inviting potential bidders publicly through the
media. Restricted tendering (only a limited number of suppliers are invited) can be used
in special circumstances, e.g. when contractors or suppliers have already rendered their
services or sold their products in a satisfactory way. But even in cases of restricted
tendering, at least three bids must be obtained.
The bids should be examined by a procurement committee of at least three members
appointed by the FPC. One committee member should be a management delegate.
All bids must be opened in the presence of the full procurement committee and recorded
in the minutes of the committee meeting.
The procurement committee pre-selects three bids and makes a recommendation to the
FPC, giving the reasons for its selection.
The FPC takes the final decision, which must be clearly recorded in the minutes.
The purchase order is issued as in procedure A or the contract is formalized.
Payment is made as in procedure A on the basis of a payment order.
Fixed assets management
The objective is to have full control over fixed assets, to ensure maintenance and prevent
unauthorized disposal or theft, as well as proper depreciation. The following rules to
safeguard fixed assets should be observed:



All fixed assets belonging to the organization are the responsibility of the FPC. The FPC
should appoint an FPC member to look after the care and administration of fixed assets.
Immediately after acquisition, each item should be numbered and tagged with its IDnumber.
The FPC should maintain a fixed assets register, with the following information:
 Identification number
 Description of item
 Date of purchase
 Purchase price
 Annual depreciation and actual value
Table 5.4: Sample form for Fixed Assets Register
FIXED ASSETS REGISTER
Name of organization
ITEM
DESCRIPTION
N°



ACTUAL
DATE OF PURCHASE ANNUAL
ACCUMULATED (WRITTEN
PURCHASE VALUE
DEPRECIATION DEPRECIATION DOWN)
VALUE
COMMENT
(REPAIR,
DISPOSAL,
ETC.)
Every reasonable care and attention must be exercised to ensure that:
 Fixed assets are maintained in good working order
 No assets ‘disappear’ or are disposed of in an unauthorized manner
Regular physical inspections of fixed assets are required to be carried out by the FPC
and the auditors.
Any time a new FPC is elected the old one must hand over fixed assets by inspecting and
writing down the status of each.
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
Depreciation must be carried out according to good accounting practice. Depreciation is
the reduction in value of an asset in the books as a result of wear and tear. An asset
loses value over time and depreciation ensures that such a loss is recognized in the
accounts. There are different methods of depreciation. The simplest is the straight-line
basis method, which is recommended for normal practice. In the straight-line basis
method, the asset is depreciated in equal instalments over the period. The duration of the
period depends on the life of the asset. For example, a computer is estimated to have a
three-year life value. If the computer was purchased for 900 USD, the depreciation will be
at the rate of 300 USD per year for three years. After this period, the asset is ‘written off’,
i.e. its book value becomes a symbolic 1 USD, although its real value is higher. Written
off assets must be maintained in the register as long as they belong to the organization.
6. CONTROL / AUDITING
We distinguish three levels of control:
 Internal control
 Internal audit
 External control
(a) Internal control
Internal control refers to the mechanisms ensuring that the organization’s resources are
managed carefully and transparently. It comprises all measures adopted to safeguard its
assets, check the accuracy and reliability of accounting data, promote operational efficiency
and encourage adherence to management policies, decisions and procedures. Internal
control mechanisms are preventive, i.e. built into daily operations to minimize risk before it
occurs.
The objectives of internal control are:
 To ensure efficiency and effectiveness of operations
 To avoid transaction risks (risk of financial loss due to negligence, mismanagement,
systems error or human error)
 To avoid fraud risks (risk of loss resulting from theft of funds and other assets, from
creation of misleading financial data, reports and financial statements)
 To ensure that financial information is complete, timely and reliable
 To ensure compliance with the law and internal regulations, policies and procedures.
Common internal control measures are:

Segregation of duties involves the separation of responsibilities for two or more tasks
that could result in error or encourage dishonest behaviour if handled by one person. For
example, assigning responsibility for procurement and cheque writing to two different
people.

Cross-checking and counter-signing of financial documents by people not involved
in the preparation of the documents: This refers to:
(i) financial reports such as the bank reconciliation statement or the monthly cash flow
report
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(ii) documents giving proof of financial transactions such as income and expense
vouchers
(iii) documents authorizing financial transactions such as purchase orders and payment
orders.
These documents are normally prepared by the treasurer and should be reviewed by two
other FPC members: a workers’ representative and a management advisor. The workers’
representative can be the chairperson, but also another FPC member appointed by the
FPC for this responsibility. The management advisor should be appointed by
management (if more than one management advisor sits on the FPC).
All the documents mentioned above should have a section at the bottom that contains the
following information on internal control:
PREPARED BY
AUTHORIZED
REVIEWED BY
(WORKERS’
REPRESENTATIVE)
or
REVIEWED BY
(MANAGEMENT
ADVISOR)
If applicable:
PROCESSED BY
(ACCOUNTANT)
The treasurer must make sure that all documents are duly signed prior to the transactions
and/or before they are handed over to the accountant.

Setting limits on expenditure: The FPC defines categories of expenditure within
amount ranges. For each category a slightly different procedure is used. The higher the
amount, the stricter the control mechanisms are. For example, a threshold value is set for
cash expenditure, let’s say 20 USD per transaction. The next category, ranging from 20
USD to 100 USD can be spent with a normal payment order. Above this threshold, the
procurement procedure as described in 5e) above applies.
Table 6.1: Sample of threshold setting for expenditures
Range in USD
0 – 20
> 20 – 100
> 100 – 500
> 500
Payment procedure
Cash payment allowed
Cheque payment, normal payment order
Cheque payment, short procurement procedure (A)
Cheque payment, full procurement procedure (B)

Signature requirements to protect the organization from unauthorized transactions. The
signature requirement as set out in the Fairtrade standards (Standards clause 2.1.5) falls
into this category of control mechanisms.

Physical controls are measures taken to verify the existence of assets as reported. For
example, counting the cash in the petty cash box and reconciling it with the amount
recorded in the petty cash book on a regular basis. Or periodically checking fixed assets
(e.g. office equipment) against the register.This should be done at least once a year.
If your operations are computerized, the FPC exposes itself to two types of risk that require
additional controls: integrity risk (the risk that non-authorized individuals will gain access to
sensitive data), and management information systems risk (the risk of losing key information
in the event of the system crashing).
The following measures can be taken to avoid computerized risks:
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
Integrity risk controls: Creating levels of access and computer access codes usually
controls integrity risks. For example, the computer system can be designed so that each
person only has access to the items in the computer that are directly related to the scope
of their work. Furthermore, each user can have a secret password that allows access. The
computer can track which user made which entries into the system.

Management information system risk control: Organizations mitigate the risk of losing
key information from the computer database by creating back-up files and storing them at
one or more locations, such as in a safe deposit box or at another office.
(b) Internal auditing
Organizations are encouraged to establish internal control bodies constituted by people not
involved in the business operations (not FPC members or FPC employees). Such a body is
the Internal Audit Committee (IAC) as referred to in the guidance to standard 2.1.12. Though
not mandatory, the establishment of an IAC is highly recommended for mid-sized companies,
and it is best practice for organizations with a large number of members (100 and above)
and/or a high premium turnover. Guidance on establishing an IAC can be found in the
Fairtrade Training Manual Fairtrade Premium Committee Principles.
According to its terms of reference (TOR) or job description, the IAC may have functions that
go beyond the scope of financial auditing. The following recommendations and suggestions
refer only to the financial auditing function of this body.
The role of the IAC is not to carry out internal control tasks as described above in Section
6a). These are the exclusive domain of FPC members.
The role of the IAC is to oversee the financial management of the FPC to ensure that:
 It serves the best interests of the workers and other beneficiaries
 It complies with the law, the Fairtrade standards, and all provisions of the organization
(constitution, rules and regulations, procedures, etc.)
 The internal control mechanisms are adequate and strictly adhered to in practice.
The IAC should perform its role by:
 Continuous monitoring of the FPC’s financial performance, particularly its adherence to
the procedures and the functioning of internal control mechanisms;
 Periodic review of key documents such as petty cash reports, monthly cash flow reports,
bank reconciliations, budget monitoring, financial statements.
(c) External financial audit
An external audit is an independent audit function that provides reasonable assurance that
financial reports are free from material mis-statement and are in accordance with legislation
and relevant accounting standards. In particular, it should examine the effectiveness of
internal controls, the accuracy and timeliness in recording transactions, and the accuracy
and completeness of financial reports. It is normally conducted at the end of the business
year, when the financial statements are finalized. But it can be ordered at any time in case of
suspicions of mismanagement or fraud.
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Only qualified and registered auditors complying with the legal requirements can provide
external audit services. The independence of the auditor is crucial to a correct and thorough
appraisal.
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Sources used in the elaboration of this manual
Accounting Manual for JB Members and Internal Auditors elaborated in the frame of the
flower programme of Max Havelaar Switzerland by Janet Okanga (Kenya)
Manual de Tesorería elaborated in the frame of the flower programme of Max Havelaar
Switzerland by Gloria Rueda (Ecuador)
The formats in Appendix 1 have been adapted from forms elaborated by Julia Malquin,
Fairtrade Liaison Officer for the flower sector in Ecuador and Colombia.
The formats in Appendix 5 have been developed by the flower programme of Max Havelaar
Switzerland.
The main source used for describing the accounting cycle in Chapter 3 Accounting and
Bookkeeping was:
http://www.netmba.com/accounting/fin/process/
For accounting principles and standards the main source used was:
SWISS GAAP-FER – Accounting and Reporting Recommendations, particularly Chapter 21
on Accounting for charitable, social non-profit organizations.
For generally accepted accounting principles:
http://en.wikipedia.org/wiki/Generally_Accepted_Accounting_Principles
For international financial reporting standards and international accounting standards:
http://en.wikipedia.org/wiki/International_Financial_Reporting_Standards
For technical terminology on finance and accounting:
http://en.wikipedia.org/wiki/Accounting
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APPENDIX :
APPENDICES 1-5 present examples and can be downloaded as separate
documents from our webpage
APPENDIX 6: Proposed text elements for a master presentation
1
Financial Planning
Budget and budgeting
A budget is a work plan expressed in monetary terms
It shows what you expect to earn (= income) and to spend (= expenditure)
The budget has two objectives:
First, to know how much money you need for a specific undertaking (project)
Second, to monitor financial performance in the course of project implementation
This chapter is about the overall budget of the organization, not about individual projects
The steps in budgeting
Define activities, as described in the yearly work plan
Estimate expenses for projects, capacity building and administration
Estimate income: surplus from previous year, Premium income, income generated by
projects (if applicable) and other income (donations from third parties and interest on savings
and investments)
Check the balance: income should cover expenses
(Explain 2.1 Sample budget)
The cash flow forecast ensures that money is available at the right moment
2
Accounting and bookkeeping
Function of accounting: to process financial information in order to know the financial
performance- amounts earned and spent and the resulting surplus or deficit
The accounting system commonly used is double-entry bookkeeping
Each transaction is recorded twice, as DEBIT and as CREDIT
(to explain how this actually works, please refer to p. 9 of the module)
The total of debit values must always equal the total of credit values
The accounting cycle refers to the whole process from the transaction to the closing of the
books
It has the following steps:
 Preparation of source documents = supporting documents that show that a transaction
has taken place (invoice, deposit slip, etc.)
This step must be done by treasurer
 Journal entry = transaction is recorded in chronological order in a book
Entries are made as debit in one account and credit in another account
This and the following steps are usually performed by the accountant (a professional)
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Posting of journal entry in general ledger = a record of transactions organized by
accounts. Accounts have a T – form (see examples on pp. 11-12)
Trial balance = the sum of all debits and all credits of the ledger accounts, it must be
equal
Adjustments = entries in the ledger accounts to give the real picture of all transactions
affecting the current business year
Financial statements = the financial summary after closing the books (end of cycle)
Financial statement consists of two parts:
Income statement = the sum of all income and expenditure during the year (usually Jan
1 – Dec 31)
Balance sheet = a list of all properties and debts and the capital owned by the
organization at a specific moment (usually end of month or end of year)
3
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Financial reporting
Information to the Fairtrade Premium Committee: responsibility of treasurer
Must inform FPC meetings on Premium income, expenditure and balance
Best practice is monthly reporting
Explain reporting formats proposed (Appendices 4 N° 1 and 5 N° 1)
Information to workers: responsibility of FPC, not only treasurer
Annual financial report (income statement and balance sheet) to GA
Annual presentation of the budget (together with work plan) to GA
More frequent reporting is recommended, e.g. monthly report on Premium income and
expenditure on notice board
Information to Flocert: responsibility of FPC
Annual financial report and budget as presented to GA
Updated information on Premium income, expenditure and balance to inspector during
inspection
4
Financial procedures
These procedures should be followed by the FPC and especially the treasurer
 Preparing source documents (by treasurer)
Income voucher for each income (Premium income, repayments of debts, etc.)
Expense voucher for each expenditure (purchases, disbursement of loans, etc.)
 Payment procedure (by treasurer and all FPC members handling funds)
Describes and regulates the steps to be followed prior to making payments
System of checks and balances for transparency and security
(Explain steps of procedure as on p. 17)
 Bank account management (by treasurer)
Recommendation: have one current account for all regular operations
Treasurer must keep record of all transactions affecting bank account (cash book)
Bank must send monthly statement of current account
Treasurer must compare records in cash book with bank statement
If balance is not equal, verify reasons
Probably bank reconciliation is required to equal balance (please refer to p. 22)
 Petty cash management (by petty cash custodian, someone other than the treasurer or
the chairperson)
Petty cash is used only for payments of small amounts
Petty cash is established by issuing cheque for the amount defined by FPC (imprest
level)
When petty cash is nearly spent, it is refunded to restore the imprest level
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All cash payments are recorded in the petty cash book
Procurement procedure (to be followed by all FPC members involved in procurement)
Procurement is the process of acquiring goods and services
Organization should strive to get best product or service at best conditions
Procurement procedure should ensure best results and transparency
(explain steps described on pp. 24-25)
Fixed assets management (to be followed by treasurer or assets manager)
Objective is to have control of fixed assets, ensure maintenance and prevent theft
(explain rules on pp. 25-26)
5
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Control / auditing
Internal control = mechanisms for self-control established by FPC for FPC
Separation of duties
Cross-checking and counter-signing of financial documents
Setting limits on expenditure
Signature requirements (e.g. joint signatories, worker and manager)
Physical controls
Internal auditing = control by a body of the organization different from FPC
Best practice is establishment of Internal Audit Committee (IAC)
It is elected by GA and accountable to GA
Role is to supervise and control financial management performed by FPC, especially
compliance of norms (standards and internal procedures)
External audit = financial control by a professional auditor independent of organization is
best practice for organizations with high premium volumes
Recommended for all other organizations
Auditor checks books and financial statement at the end of fiscal year
Can be called any time in case of suspicion of fraud or mismanagement
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